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Bulls Zero In On United Continental (UAL)

Calls seven times normal levels as UAL investors possibly seek profits from 787 fallout

by 2/6/2013 2:36 PM
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Option traders could be turning to United Continental Holdings Inc (NYSE:UAL -- 25.17), parent of United Airlines, as a way to cash in on the The Boeing Company's (NYSE:BA - 76.13) 787 Dreamliner saga, perhaps placing bets that UAL will be a viable competitor and alternative to airlines now being forced to cancel flights. Call activity on UAL is seven times its normal level today, with February and March calls getting the most attention.

One of the most popular options was the back-month March 26 call, which has seen more than 10,000 contracts cross the tape thus far. Implied volatility has ticked up 1 percentage point and volume nearly doubles open interest, meaning at least some of these contracts were bought to open. With a volume-average weighted price (VWAP) of $0.60, the stock would need to reach $26.60 (stock price plus VWAP) at the close on March 15 for these contracts to break even. That marks a nearly 5.7% premium above current trading levels. The delta on this option is 42%, meaning it has a less than 1-in-2 chance of breaking even. If UAL is trading south of the strike price at expiration, all the call buyers stand to lose is the premium paid.

The option market's newfound optimism rides against recent trends, which have been very bearish until today. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows that the 10-day put/call ratio on the equity is 2.99, meaning traders were buying to open nearly three puts for every call during the last two weeks. In addition, this ranks higher than all but 1% of other readings taken in the last 12 months -- showing just how much more pessimistic traders have been recently.

Technically, UAL has been on an upswing, gaining 44.2% since hitting its 12-month nadir of $17.45 as part of a late-summer swoon. The stock also is up more than 7% year to date, putting some of the bad news and customer animosity behind it following the merger between United and Continental. But it has had a downturn recently, with the stock's 20-day moving average serving as a resistance, along with the $26 level.

Perhaps some of the new attention could be coming from the ongoing saga involving BA's 787 Dreamliner. Battery problems and fires have forced the 50-plane fleet to the ground, and that especially hurts Japan Airlines and All Nippon Airways. Both carriers have been forced to cancel flights between Japan and the U.S. UAL has a strong presence in Asia, and could be viewed as being able to pick up the slack.


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